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Collateral damage: Microloans gone bad

If profit is the prime motive, the poor will always get the raw end of the deal.

When lives are on the balance sheet, how should a credit program for the poor work best? India’s Society for Elimination of Rural Poverty reports that at least 70 suicides in the state of Andhra Pradesh in 2010 were the result of emotional stress generated by crushing personal debt. In a land where the fiscal sins of the father can be passed on to the next generation, suicide because of debt is sadly not a novel problem. What distinguishes these unfortunate debt-holders in Andhra Pradesh is the source of their debt. These folks acquired their burdens from microfinance institutions.

In recent years the idea of microfinance has been introduced—and celebrated—as an innovative approach to poverty alleviation. The microcredit phenomenon originated with the Grameen Bank in Bangladesh in the 1970s. The idea was simple: Part of the reason people remain poor was because they had no access to credit and were forced to go to neighborhood loan sharks when they needed money, beginning a cycle of debt-holding that only further impoverished them.

Grameen-style microfinance efforts make tiny loans to people without traditional collateral. So how did a program meant to unleash the entrepreneurial instincts of the world’s poor become instead a murderous burden?

Greed is the simplest explanation, and in this case greed was not good. Social entrepreneurialism—a catchphrase in antipoverty circles in recent years—embraces the presumed efficiencies offered up by the world of private enterprise. Funders want to see as “good” a “return on their donations” as they can anticipate from the vigorous efforts aimed at maximizing their return on investments. There’s nothing wrong with applying some of the best practices from business to the work of helping lift up the world’s most vulnerable people, as long as the dignity of those individuals remains the “profit” that all are interested in generating.

In India the profit motive has overrun the original intent of microcredit programs. For-profit microcredit operations, intent on demonstrating that capitalism and the free market can “fix” just about everything, began behaving little better than the neighborhood loan sharks that microcredit entities were meant to replace. The poor found themselves on a new and not-so-improved version of their previous debt carousel with predictable results.

This is tragic and not only at the personal level in Andhra Pradesh. Microcredit enterprises now touch the lives of as many as 100 million poor people worldwide. It is crucial that we get this right. That makes it more important to pause now to hear what the poor in India are trying to tell us about their experience with microfinance.

A great human failure is to live in a world of absolutes, to elevate good ideas to impregnable ideologies and in so doing to become enthralled to them. In recent decades, owing to a political and rhetorical drumbeat out of the United States and the West, a neoliberalism proposes that all “market failures,” what we might understand as social and community problems, are best resolved through the mysterious machinations of the free market. Under the thumb of the market’s invisible hand, systems, programs, and initiatives are always suspect unless they can demonstrate a profit or at least self-sufficiency.

“Capitalism doesn’t have to be a bad thing,” says one of India’s newly emerging microcredit entrepreneurs. “If you can’t profit off the poor, it means that no companies will service the poor—and then they will be worse off than earlier.”

Only if that’s part of the business plan. The church has long celebrated the liberating potential of the free market, but it has always added a caveat: Economic systems and institutions are meant to serve humanity and not the other way around.

It’s wonderful if a social good can be achieved in a manner that generates a profit, which can then enrich an individual or in turn be reinvested in jumpstarting or imagining new economic engines of human development. Sometimes that is just not possible, but that doesn’t mean that a given effort is not worth doing. Doing good for the poor, even if it means not doing well on an ROI spreadsheet, remains worth it.­

This article appeared in the March 2011 issue of U.S. Catholic magazine (Vol. 76, No. 3, page 39).